Declining gas prices and a modest slowing in food price inflation should help keep inflation expectations in check and boost consumer purchasing power. Some categories such as used auto prices continue to gradually normalize, while easing constraints across supply chains and softening in the housing/rental market look promising for further moderation ahead.
There remains considerable ground to cover before getting inflation back to a pace that resembles the Fed's target. Over the past three months, the core CPI has advanced at a 6.5% annualized pace, more than triple the 2% target. Moreover, a sustained return to 2% inflation remains even more distant at present. The tight labor market has kept compensation, the largest cost for most businesses, advancing well above 2% (even after accounting for productivity growth), while consumer and business inflation expectations remain high relative to the range of recent decades. We think the road to returning inflation to target is still a long one, and we continue to look for the FOMC to press ahead with another 75 bps point hike at its meeting next week
- Wells Fargo
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